Peer to Peer Lending: Prosper Marketplace or Lending Club?

Peer to peer lenders allow people to lend and borrow from each other. The two largest companies in this business are Lending Club and Prosper. I have been a customer of both for several years, and here is a quick comparison guide on which company's service you should choose if you are looking to borrow or lend money.

For Borrowers

If you are a borrower who wants the lowest rate for your loan, then Prosper Marketplace has a slight edge over Lending Club. The reason is that Prosper's credit requirements are less strict than Lending Club. The minimum credit score requirement at Prosper is 640, whereas it is 660 at Lending Club. You can also set up your loan request as an auction at Prosper. From my experience, those with decent credit profiles get lower rates at Prosper than they would at Lending Club because lenders bid down the rates of the good borrowers quite a bit.

Additionally, borrowers that could qualify as an AA rating at Prosper may only be rated a C or D at Lending Club because Lending Club's rating formula takes into account factors such as debt-to-income ratio and loan size. Even though Lending Club's fixed interest rates are lower than Prosper's for certain credit ranges, it is possible that most borrowers would be rated higher at Prosper and consequently receive a lower rate.

In addition to the interest rate, you have to consider the origination fee. Once again, the fees are lower at Prosper for most borrowers. At Prosper, the origination fee for a person with AA credit is only 0.50% with no minimum, where as at Lending Club the lowest origination fee is 2.25% for a 36-month loan. The origination fee has a $75 cap at Prosper no matter what your credit score is, but at Lending Club it could be as high as 5% of the loan. So if you have a credit rating in the lowest range of both marketplaces, then the difference in just the origination fee on a $25,000 loan could be as high as $1175. The bottom line is that Prosper is cheaper for borrowers.

However, for those borrowers with lower-amount loans and credit in the middle ranges, then Lending Club's origination fee could be a little cheaper. For example, a person with a $2000 loan request with a credit rating of A would be charged $45 at Lending Club, but he or she would be charged 3% or $60 at Prosper. However, since Prosper is more lenient on the credit assessment, it is very likely that an A borrower from Lending Club could be rated AA at Prosper and receive a 0.50% origination fee.

Although it seems that Prosper would give a borrower the lower rate, you do have to consider that Lending Club is the only one that offers 5-year loans. If you want a lower monthly payment and a longer repayment period, then Lending Club is the way to go. Also, another reason for a borrower to consider Lending Club is that almost all of Lending Club's borrowing requests are funded because they approve a smaller pool of borrowers, whereas at Prosper there are many borrowing requests that do not completely fund.

For Lenders

If you are a lender, then Lending Club is the platform for better returns. One big reason is that it seems that the screening Lending Club uses for borrowers is just much stricter. Most loan requests are rejected outright so the quality of borrowers is higher. Additionally, as I already pointed out, the fees for borrowers with lower credit is fairly high, which turns many borrowers away.

From my experience in the past three years, I have had one default at Lending Club, while at Prosper nearly half of the borrowers have defaulted. I chose the highest-rated borrowers in both marketplaces, so it would seem that the pool at Lending Club is just better. Lending Club also has a very good collection process that starts as soon as the loan goes late, and you are updated on the collection process. I have had a couple late loans that were actually cured by Lending Club, whereas at Prosper there is very little transparency to how they collect on late loans.

Additionally, Lending Club has an IRA program where you can let your investments grow tax free. This is great for those who are looking to invest long term because the interest paid from peer to peer loans are usually taxed at your highest marginal tax rate if it isn't tax sheltered. Lending Club also offers bonuses from time to time for doing various tasks, such as setting up recurring deposits.

Personally, I am lending at Lending Club exclusively now because the default rate has been quite low and the returns has been consistent. I have had one loan default after two-and-a-half years and the overall return is around 9%. I have been monitoring my loans once every week and selling off the loans that show drastic changes in the borrower's credit score. I usually sell those loans at a slight discount of 0.5 to 1% and they usually sell within a day, so I would say that the liquidity is fairly good. Prosper also has a note trading system, but it seems that the notes I put up for sale are just not moving as fast because they have already defaulted.

Although I am no longer adding more money to Prosper, I have to say that if you have a high tolerance for risk then there are loans at Prosper that offer better rates than at Lending Club. I do have a few performing loans at Prosper that are paying 30%, and that is a rate not reachable at Lending Club.

The bottom line is that these peer to peer lending marketplaces do facilitate money lending between people, but you as a consumer should always research which option is the best for you. If you are looking for a personal loan of $25,000 or less and have a credit score of at least 640, then it doesn't hurt to check out these peer to peer lending companies. The loans are much cheaper than getting a payday loan and I think the fees are very reasonable. If you are an investor looking for a better return on your idle cash, then Lending Club might be the better choice for getting your feet wet. After three years, I think that the peer to peer lending industry has improved quite a bit, and I hope that it is here to stay because it is a good alternative to many other loan options.

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It is absolutely wonderful that people have options now. Before, it used to be that the only option was going to a bank or beg money out of friends and family. Now peer lending offers great rates for borrowers, and allow others to invest the money.

Congrats on the great return. I've been investing at Lending Club for a little over one year with 15% NAR thus far. It will be interesting to see the transition of P2P Lending sites like these from the internet savvy and finance minded types into the mainstream.

I had never thought of selling notes with "down" credit scores, excellent! Is there an easy way to find all your notes with "Credit Score = Down"? I have over 250 loans and it's a bit of a pain to have to go into each one to check their score (especially the way it resorts the list when you go back to the main listing)? Also, do you have any criteria for "how far down" the score goes before you sell? I see that some of mine have dropped just a few points, while other have fallen off a cliff. Thank you.

I just check my loans once a week and check the ones that are about to be due in the next 10 days. If the credit score has fallen by more than 2 rungs (50 to 75 points) then I put a sell order on it. So far it has worked well because some of these borrowers have gone into 30 to 120 late status.

If you want to check less loans you can just check the loans that are due in the next 3 or 4 days. The idea is that you don't need to check the loans that are due in a month anyway because if those folks are current it means they just paid.

Guest #9

I've been using Lending Club and Prosper for a few years. My tolerance for risk is quite high, which seems to be different from the author. As you might expect, because of this difference I've come to the exact opposite conclusions, I find that Prosper has better returns, and I consider Lending Club's trading platform to be maddening.

Our family has been investing in notes from both Prosper Marketplace and Lending Club for about 2-3 years. I is nice having both accounts because it allows us to be a little more selective with the notes we choose to invest in. From our experience, peer-to-peer is a great investment alternative. We actually plan to eventually use these two accounts to replace our emergency fund. Since investors receive steady monthly payments from each note they have invested in, and the payments are liquid, one can theoretically use the cash flow from the payments to live on for a decent length of time. But for now, we are re-investing those payments so we can build up the monies in both accounts.